Term Sheet

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Hedge funds can now advertise. What it really means.

July 10, 2013: 11:24 AM ET

SEC Under Fire As Wall Street Investment Banks Falter

The SEC today voted to let hedge funds and others "generally solicit." What does that mean?

FORTUNE -- The Securities and Exchange Commission today voted 4-1 to end a decades-old ban on "general solicitation" by many private issuers, including hedge funds, private equity funds and start-up companies.

The recommendation to do so first appeared in the JOBS Act, a piece of bi-partisan capital markets legislation that became law in March 2012.

In short, this means that all sorts of private issuers soon will be able to publicly discuss and advertise investment opportunities. They also can do things like publicize past performance, which previously had been prohibited.

It's important to note, however, that such issuers still may only sell such securities to accredited investors. For individuals, accreditation requires net worth in excess of $1 million and/or annual income in excess of $200,000 (it's a bit different for married individuals, with fewer than 8% of American households qualifying). For institutions like charitable organizations or family trust, the asset threshold is $5 million.

Here are five more specifics of the new rule:

1. Issuers do not need to generally solicit. They may continue to do business the old way, which many of the top-performing fund managers are likely to do.

2. For issuers that do generally solicit, they would be required to take "reasonable steps" to verify investor accreditation. This may include the receipt of tax returns or bank account statements. This differs from current policy, which basically just requires that investors "check a box" saying that they are accredited. In other words, the burden of proof has shifted.

3. Issuers utilizing general solicitation would be required to file a Form D with the SEC at least 15 days prior to the beginning of general solicitation, and also file an amended Form D within 30 days after the offering is terminated (either because it closed successfully or was abandoned). And it's important that issuers follow these rules, since failure to do so could cause the SEC to ban them from subsequent securities issuance for a year or more.

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4. The SEC also approved by a 3-2 vote certain changes to the Form D filings themselves, including a breakout of investor "type." Apparently all of these additional filing requirements are to help the SEC collect data to learn how general solicitation is being used, and if additional changes (or reversals) are in order. In the short term, it basically means more lawyer fees.

5. Hold up. As much as I'd like issuers to begin calling me this moment with information on their new fund -- or offering to advertise in Term Sheet -- it will take at least a week before this new rule actually becomes official by being published in the federal register (and then it doesn't become effective for another 60 days after that). Plus, there are those Form Ds that need to be filed first.

For more, the SEC has published the full list of new rules on its website.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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